Dec. 18 (Bloomberg) -- Australian stocks are poised for the
worst quarter relative to global equities in two years as
manufacturers from Ford Motor Co. to General Motors Co. exit the
nation and consumer confidence drops.

The country’s benchmark S&P/ASX 200 Index fell 2.2 percent
from the end of September through yesterday and the MSCI All-Country World Index of global developed and emerging market
shares gained 2.9 percent. That’s the biggest gap since December
2011. Valuations on the S&P/ASX 200 peaked this year at 16 times
estimated earnings on April 30, compared with the average
multiple of 13.7 in the past five years, according to data
compiled by Bloomberg.

Rising unemployment and lower mining investment threatens
22 years of consecutive economic growth in Australia as traders
bet there is only a 15 percent chance the central bank will cut
the benchmark overnight cash rate target at its next meeting in
February. About $67 billion was wiped from the value of the
stock market this quarter as a report this month showed the
economy expanded slower than economists forecast.

“People are very nervous about the local outlook,” George
Boubouras, who helps oversee $30 billion as chief investment
officer at Equity Trustees Ltd. in Melbourne, said in a
telephone interview on Dec. 12. “Corporate Australia is still
relying on cost cuts. You need the cash rate to be cut in the
first half of next year to turn the corner. There is now more
upside versus downside to Aussie equities,” he said,
forecasting the S&P/ASX 200 will rise to 5,950 by the end of
2014. It closed at 5,096.10 today.

Biggest Drop

Forge Group Ltd. has slumped 88 percent this quarter, the
biggest drop among companies on the S&P/ASX 200 Index, after
forecasting a loss and leading declines among mining-services
companies already struggling as the world’s biggest miners BHP
Billiton Ltd. and Rio Tinto Group cut spending.

The value of mineral and energy projects being developed in
Australia dropped 10 percent to about A$240 billion ($213
billion) as of October from six months earlier, the Bureau of
Resources and Energy Economics said in a Nov. 27 report. After
the peak of a decade-long commodities boom in Australia, the
world’s biggest iron-ore and coal exporter, resources companies
are scaling back investment.

“Mining investment is expected to continue to decline for
several more years,” Shane Lee, a Sydney-based strategist at
CIMB Securities, said in an e-mail on Dec. 12. “The drag on the
market in 2013 was materials, but we expect this sector to be
one of the main engines of market returns next year.”

Lee forecasts earnings will grow 17 percent in 2014 for the
materials industry. That group in the S&P/ASX 200 has fallen 9.1
percent this year.

Budget Deficit

Australian Treasurer Joe Hockey said Dec. 17 that the
budget deficit will balloon to A$47 billion in the fiscal year
through June 30, 2014, up from an August estimate of A$30.1
billion, as the mining boom wanes and the nation’s currency
remains “uncomfortably high.”

The government estimates economic growth will be 2.5
percent this fiscal year, less than the 3 percent estimated in
May. Hockey pledged spending cuts, including in assistance to
the motor industry, to try to rein in debt.

General Motors’ local Holden’s unit said last week it will
cease making cars in Australia in 2017, citing high costs due to
an almost 50 percent increase in the Australian dollar in the
past four years. About 2,900 employees will lose their jobs at
the automaker’s plants in South Australia and Victoria states.
In May, Ford said it will exit Australia in 2016, also citing
the currency among reasons to cease production.

Qantas Tumbles

Qantas Airways Ltd., the country’s largest airline, tumbled
30 percent this quarter after saying it expects to lose as much
as A$300 million in its first half, forcing the carrier to
either take on debt, issue shares or sell assets to pay for new
planes.

Australia’s dollar has dropped 14 percent this year, the
steepest decline after the yen among 10 developed-nation
currencies tracked by Bloomberg Correlation Weighted Indexes.
That comes after an almost 50 percent increase in the so called
Aussie in the four years through Dec. 31 as the China-led
commodities boom spurred demand for the currency.

A lower level of the currency “would likely be needed to
achieve balanced growth,” according to minutes of the Reserve
Bank of Australia’s Dec. 3 meeting released this week.

Interest Rates

“We continue to expect the RBA to leave interest rates on
hold, but the risks in the short term are still skewed toward
more rate cuts, particularly if recent bad news regarding
Holden’s and Qantas adversely affects confidence,” Shane
Oliver, who helps oversee $131 billion as head of investment
strategy at AMP Capital Investors Ltd. in Sydney, said by
telephone Dec. 17.

Traders see a 15 percent chance of a cut to the benchmark
interest rate from a record-low 2.5 percent when the central
bank meets in February, according to swaps data compiled by
Bloomberg. Thirty economists surveyed by Bloomberg forecast no
change to the rate in 2014.

Consumer confidence fell this month to the lowest level
since July, according to a Westpac-Melbourne Institute gauge.
Third-quarter gross domestic product advanced 0.6 percent from
the previous three months, missing economists’ forecast for a
0.7 percent expansion.

Relative Value

The drop in the S&P/ASX 200 this quarter has pared its gain
this year to 9.8 percent, compared with the S&P 500 Index, which
is up 25 percent. Earnings-per-share on the Australian benchmark
will climb by between 6 percent and 7 percent in 2014, according
to UBS AG estimates.

The Australian gauge traded yesterday at 14.7 times
estimated earnings, 7.3 percent higher than the five-year
average, according to data compiled by Bloomberg. That compares
with a current multiple of 16 on the S&P 500.

“Unlike the U.S., Australian growth is likely to decline
in 2014 as the growth handover from mining to non-mining
continues to struggle for traction,” Matthew Sherwood, Sydney-based head of investment markets research at Perpetual Ltd.,
which manages about $25 billion, said by telephone Dec. 12.
“Investors enter 2014 with valuations stretched, earnings
growth forecasts optimistic and with clear growth risks.”